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Following
the fire incidents, the government has stated its dedication to enforce
regulations on industrial building usage to protect public safety. We believe
this will be the first in a series of actions by the government, and additional
measures will likely be introduced in the future to further regulate the safety
and usage of old industrial buildings.

Landlords
will tend to terminate leases of violating tenants in order to avoid
authorities seizing the premises.

Affected
tenants will need to secure alternative space, either in industrial premises
with waivers, or in commercial buildings. The tight vacancy will pose an
immediate challenge for non-compliant tenants looking for legal space, which
may involve higher costs and have a serious financial impact on many
businesses.

Dangerous
goods storage operators will also have fewer options in leasing industrial
space as more landlords of single-owned buildings will attempt to mitigate the
risk of leasing space to them at the expense of other tenants.

The
reduced flexibility in industrial building usage will in the long run increase
vacancy risk in industrial buildings and negatively impact investment values.

While
the new enforcement actions are seen as appropriate to curtail activity in
industrial buildings potentially detrimental to public safety, the government
still needs to urgently address the lack of cost-effective commercial space
available to emerging service industries.

Background:

Following
the recent fire incidents in two industrial buildings in Kowloon Bay and Cheung
Sha Wan, the government has inspected industrial buildings and discovered there
are some with high flows of people which are being used illegally for
commercial or other community purposes, while also being used for the storage
of dangerous goods.

The
owners of these premises violating the land use are required to rectify the
issue within 14 days from the date of warning letters issued on August 29, or
the District Lands Office will commence procedures to seize the premises from
the landlord.

Landlords
of buildings in breach of the lease but without any dangerous goods storage in
the same building are required to correct unauthorized usage within 28 days
from th​e date of the warning letters.

According
to the Planning Department, as of 2015, 29% of space in industrial buildings is
occupied for non-industrial usage (although they are not necessarily
non-compliant) which is equivalent to approx. 87 million sq. ft.; while another
14% of space has unidentified usage.